Time Series Analysis of the Dollar/Won Exchange Rate

Abstract

This paper employs the sticky-price asset model (Hooper and Morton 1982) and the Sims' innovation accounting technique to assess the relative contributions of the determinants of the U.S. Dollar/Korean Won exchange rate. Monthly data during the period July 1974 through October 1988 are used in the analysis. Tests are made for stationarity and cointegration of the variables. The results indicate that in the short-run more than half of the forecast error variance of the (change in the log of the) exchange rate is due to its own innovations. The relative importance of economic fundamentals becomes greater as the forecast horizon increases. In the long-run (3 years) innovations in economic conditions account for about 70% of the forecast error variance of the exchange rate.